December 1st, 2012:

Analyst Predicts Oil Price Drop to $50/Barrel

The current surge in U.S. crude oil production could put so much downward pressure on domestic oil prices that a price of $50 a barrel is possible in the next two years, according to an analysis reported by Business Insider.

The article cites the 2013 Energy Outlook prepared for investors by Bank of America and Merrill Lynch. In the report, analyst Sabine Schels and colleagues highlight the effects of rapidly rising oil production in several U.S. states.

"North America's energy supplies are surging while the rest of the world continues to fight for scarce molecules of oil and gas," the analysis states. "On our estimates, onshore U.S. crude oil output now vastly exceeds previous growth rates in liquids and nat gas, particularly in Lower 48 states. With profitability for U.S. domestic oil producers very high and no change in sight to U.S. rules preventing crude oil exports, we expect [West Texas Intermediate crude (WTI)] prices to continue to lag international prices. Indeed, we see a risk of WTI temporarily falling to $50/barrel over the next 24 months to force a slowdown in supply growth or a change in crude oil export rules."

WTI crude is now priced at about $86 per barrel. A decrease to $50 a barrel would represent a 42 percent price reduction.

"The basic story is that shale production is growing like crazy - faster than anyone has expected - and the infrastructure can barely keep up," Business Insider reports. "Oil production growth in the U.S. has put other non-OPEC nations to shame."

The article states that "oil producers have no reason to stop pumping. Their borrowing costs are at record lows, and their breakeven profitability levels are well below current prices. ... Refining capacity is also very tight right now. So the bottom line is: Massive production, low breakeven costs, low financing costs, and tight capacity across the entire petroleum infrastructure. The ingredients are there for a price collapse."